Wednesday, December 8, 2010

Applications for new mortgages rose again last week, and are up almost 30% from the July lows, in a good sign that the housing market is unlikely to suffer another relapse and may even be putting in a bottom.

Meanwhile, mortgage rates have jumped from their lows, and are going to be rising further, since the yield on Fannie and Freddie MBS has shot up 100 bps from the early October lows. Will this kill the housing market? I doubt it. Rates are still very low from an historical perspective. If anything, the recent rise in rates is likely to stimulate mortgage demand: "get it before the price goes higher." Plus, rising rates in general are symptomatic of improving economic fundamentals.

6 comments:

Home Depot yesterday announced an increase in its sales and earnings estimates. HD operates over 2200 building supply and home improvement warehouse stores nationwide and in Canada. To move a needle this big HD must be seeing large sales increases in big ticket items such as appliances, and plumbing and electrical supplies. People are clearly spending money again on their homes. This is good news for the housing market.

HD guided 2010 revenue growth up to 2% over 2009 and 2-2.5% higher for 2011. If John had actually read the company's press release, he would have noted in his post that HD is seeing a decline in remodeling and other things that add value to homes. Instead, HD is seeing the increase due to deferred maintenance projects and new projects that decrease the operating expense of owning homes. HD is shrinking its kitchen space by 40% in its stores because there is no demand for these products and services. HD's guidance is consistent with continued slow growth in residential property investment.

For me, it is interesting that any evidence of any growth rate is latched onto by many as evidence of some economic turnaround. The US economy is not getting worse and it is growing a little year over year. When Reagan's policies helped propel the economy out of recession, there were five consecutive quarters of >6% annualized growth. Even then, it took five more years for employment numbers to normalize.

Thank you for informing me of what I have and have not read. Your assistance is appreciated.

My intention was to point out that HD has increased its earnings guidance for 2010 'yet again' (according to DJ newswires) and that the cause was increased sales, not share buybacks. HD's CFO called November sales "terrific" and that shoppers spent money "across all catagories".

What is significant here is the direction of the change. HD's business is getting better, not worse. One may see the glass half empty if one so chooses but I would suggest the market prefers to see it half full. The shares are up some 13% so far in december. This represents several hundred million dollars being bet that things are improving.

You are correct that growth is slow. And I admit that I seek evidence of improvement. I do not claim that the economy is robust, especially in the housing market. But there are benefits if one can see change coming before the crowd sees it. And that is what I seek to do.